Perspective News

In June 2010, the coalition government announced that, in future, state and public service pensions would increase in line with the Consumer Price Index (CPI) rather than the Retail Prices Index (RPI). The change, announced in an Emergency Budget, aims to help the government cut the UK’s sizeable budget deficit.

CPI does not include housing-related costs such as mortgage interest payments, buildings insurance and council tax. The rate of CPI tends to run below that of RPI and the government contends CPI is a more appropriate measure of inflation because it strips out these costs.

In order to ensure consistency, the government subsequently applied this ruling to occupational pensions. However, the news triggered a complex debate over whether all private pension schemes would be able to move to CPI. According to a survey undertaken by the National Association of Pension Funds (NAPF), 61% of pension schemes cannot switch to CPI as their small print refers specifically to RPI.

The NAPF criticised the ensuing uncertainty, warning pension funds would find it difficult to plan ahead. The association believes that a switch to CPI could increase flexibility for pension funds, but warned that the implications for current and future pensioners should be carefully considered.

KPMG’s 2011 Pensions Accounting Survey showed many companies have already benefited from a switch from RPI to CPI. However, KPMG warned pension schemes’ scope to move from RPI to CPI is “a small print lottery” that hangs on precedent as well as the precise wording of each scheme’s rules.

If you have any queries regarding your pension please contact us.

The contents of this article should not be construed as advice and do not necessarily reflect our views. Independent Financial Advice should always be attained in order to assess your own individual circumstances.